Tuesday, March 20, 2012

Phoenix Capital Research predicts the Euro won’t survive 2012. So does James Quinn in his annual forecast among many others.

Most prognosticators deliberately provide a fuzzy time frame with their forecasts. It is prudent to do so. The prediction is likely true, although whether it will occur in 2012 or not is debatable.

There is great staying power for governments and institutions. They always take longer to die than reasonable estimates suggest. Extra longevity comes from their ability to ignore laws and contracts and utilize coercion on their citizens in the form of increased taxation, capital controls and often outright confiscation. Will the Euro die? Yes. Will it die in 2012? It may well do so, although be ready for whatever means possible to avoid that ending. The elites and their cronies are powerful. They have no interest is seeing the Euro die.

With that reservation in mind, here is Phoenix Capital Research’s take:

The Euro-zone in its current form is in its final chapter. Anyone who argues otherwise is not paying attention.

Consider the Greek situation. Greece’s debt problems first made mainstream media headline news at the beginning of 2009. The IMF/ EU/ ECB/ and Federal Reserve have been working on this situation for two years now. And they’ve yet to solve anything: after two bailouts, significant debt write-downs, and numerous austerity measures, Greece remains bankrupt.

Now, if the Powers That Be cannot solve Greece’s problems… what makes anyone think that they can address larger, more dangerous issues such as Italy or France, etc?

Consider that the world’s central banks staged a coordinated intervention in November… and Italy’s ten year is back yielding more than 7% less than two months later. Again, a coordinated intervention by the world’s central banks bought less than two months’ time for Italy.

And now we find the debt contagion spreading to France:

French Debt Costs Rise at Bond Sale as AAA Decision Looms

France sold 7.96 billion euros ($10.2 billion) of debt, with 10-year borrowing costs rising in the country’s first bond auction of the year as credit-rating companies threaten to cut the nation’s AAA grade.

The government sold 4.02 billion euros of the bonds maturing in October 2021 at an average yield of 3.29 percent, from 3.18 percent on Dec. 1. The euro fell to its weakest level against the dollar in 15 months, and the extra yield investors demand to hold French 10-year bonds instead of benchmark German bunds widened to the most in about six weeks.

Many are in denial that our country is in decline. Not slow decline either, but a relentless slide that produces Escape From New York conditions. A trailer can be watched here. For those who are unaware of this movie, Wikipedia describes it as follows:

[It] is a 1981 American science fictionaction film directed and scored by John Carpenter. He co-wrote the screenplay with Nick Castle. The film is set in the near future in a crime-riddenUnited States that has converted Manhattan Island in New York City into a maximum security prison. Ex-soldier Snake Plissken (Kurt Russell) is given 24 hours to find the President of the United States, who has been captured after the crash of Air Force One.

Carpenter wrote the film in the mid-1970s as a reaction to the Watergate scandal, but proved incapable of articulating how the film related to the scandal. After the success of Halloween, he had enough influence to get the film made and shot most of it in St. Louis, Missouri.[3]

The film’s total budget was estimated to be US$6 million.[1] It was a commercial hit, grossing over $50 million worldwide.[2] It has since become a cult film.

It is nice to see that Richard Russell, famed octogenarian investment newsletter author, has apparently recovered fully from his recent setback. This quote is an example of his outlook on markets (emboldening added):

Subscribers who are buying or holding stocks on the on the basis of the better employment news should remember that deteriorating internals in the face of improving newspaper headlines give us the worst of all markets. I cannot warn subscribers strongly enough that they face hard times in both the market and the economy during the months ahead. The operative words now are “extreme caution.” Please be out of all common stocks with the exception of the mining shares. According to my studies this year it’s going to be a long, cold fall and winter.

It is difficult to argue with his outlook, although mining stocks likely have not done well in down markets, at least during the primary downward moves. Longer term they should be fine. I currently own them although not in aggressive quantities.

We are living through the death throes of an empire. For those citizens who understand what is occurring, the process is akin to being trapped in a taxicab where the meter is on and running at an infinite pace. We cannot get out; nor will we be able to pay when the bill is submitted.

Government Duplicity

The duplicity and outright lies of government are becoming more apparent. There are too many to list here. Here are a few:Favorable forecasts regarding the economy are cruel jokes to everyone, but especially to those unemployed and underemployed. The country is told that the economy is out of the woods and on its way, recovering from the worst recession since the 1930s. No one with an IQ higher than room temperature or the ability to see should believe that.The Obama Administration stumbled badly with their first major promise. We were told that if the stimulus package was passed, unemployment would not exceed 7%. It was passed and unemployment soared over 10%. The package had no promised shovel-ready jobs and turned out to be the biggest pork bill ever. Virtually nothing went to Main Street to help individuals. Unions, government employees and other
Democrat constituents were the primary beneficiaries along with the banking industry. President Reagan, like President Obama, inherited a difficult situation when he entered office. To the right is a comparison of what happened under Reagan and under Obama. The chart compares unemployment rates. Changes in the manner in which unemployment is currently measured favorably distort the unmitigated disaster that is

Monday, March 19, 2012

The ECB doubling their balance sheet and funneling trillions to European banks will not solve anything. The truth that no one wants to acknowledge is the standard of living for every person in Europe, the United States and Japan will decline. The choice is whether the decline happens rapidly by accepting debt default and restructuring or methodically through central bank created inflation that devours the wealth of the middle class. Debt default would result in rich bankers losing vast sums of wealth and politicians accepting the consequences of their phony promises. Bankers and politicians will choose inflation. They believe they can control the levers of inflation, but they have proven to be incompetent, hubristic, and myopic. The European Union will not survive 2012 in its current form. Countries are already preparing for the dissolution. Politicians and bankers will lie and print until the day they pull the plug on the doomed Euro experiment.

Mr. Quinn believes that excessive debt, rather than being addressed, will continue to be abused by government leading to an inevitable end:

… the excessive levels of sovereign debt will slow economic growth to zero or below in 2012. At worst, interest rates will soar as counties attempt to rollover their debt and rolling defaults across Europe will plunge the continent into a depression. The largest banks in Europe are leveraged 40 to 1, therefore a 3% reduction in their capital will cause bankruptcy. Once you pass 90% debt to GDP, your fate is sealed.

Contrary to what you have been told about de-leveraging under way, Mr. Quinn states that is not the case (my emboldening):

In a world inhabited by sincere sane leaders, willing to level with the citizens and disposed to allow financial institutions that took world crushing risks to fail through an orderly bankruptcy process, debt would have been written off and a sharp short contraction would have occurred. The stockholders, bondholders and executives of the Wall Street banks would have taken the losses they deserved. Instead Wall Street used their undue influence, wealth and power to force their politician puppets to funnel $5 trillion to the bankers that created the crisis while dumping the debt on taxpayers and unborn generations. The Wall Street controlled Federal Reserve provided risk free funding and took toxic mortgage assets off their balance sheets. The result is total credit market debt higher today than it was at the peak of the financial crisis in March 2009.

The country is experiencing accelerating rates of money inflation. Thus far, this money growth has not translated into price inflation primarily because of reporting bias in the CPI index and the fact that we are in a recession (regardless of whether the government calls it one or not). Any fiat money system survives only based on confidence. Once confidence is lost, so too is the currency. Quinn succinctly describes the anomaly supporting our currency:

The world has total confidence in pieces of paper being produced at a rate of $3.7 billion per day. Confidence in Ben Bernanke, Barack Obama and the U.S. Congress is all that stands between continued stability and complete chaos. What could go wrong?

Mr. Quinn’s forecast is worth reviewing. It is chock-full of informative graphs and strong opinions. As an example, the following graph supports his argument that we are still in recession (depression?) and that we have become a corporatocracy:

Quinn is not one to mince words or opinions. Is his forecast reasonable? Yes, although predicting it to hit in 2012 may not be. It seems too compressed a period for all his events to play out. Over a bit longer time frame, perhaps. It is more difficult to forecast timing than quantities. Generally, institutions take longer to die than we expect.

The recovery propaganda is destroyed by this list of two dozen statistics that are frightening. The list is from The Economic Collapse website and truly reflects how hollowed out our economy has become. Were it not for the debt binge, standards of living would have been reduced long before this time.

Read it and weep:

Beware of bubbles of false hope. Right now there is a lot of talk about how the U.S. economy is improving, but it is all a lie. The mainstream media can be very seductive. When you sit down to watch television your brain tends to go into a very relaxed mode. In such a state, it becomes easy to slip thoughts and ideas past your defenses. Sometimes when I am watching television I realize what the media is trying to do and yet I can still feel it happening to me. In this day and age, it is absolutely critical that we all think for ourselves. When you look at the long-term trends and the long-term numbers, a much different picture of the U.S economy emerges than the one that is painted for us on television. Over the long-term, the number of good jobs in America has been steadily going down. Over the long-term, the number of Americans living in poverty and living on food stamps has been steadily going up. Over the past couple of decades, tens of thousands of businesses, millions of jobs and trillions of dollars of our national wealth have gone out of the country. Our debt is nearly 15 times larger than it was 30 years ago, and U.S. consumer debt has soared by 1700% over the past 40 years. Year after year the rate of inflation goes up faster than our incomes do, and

The argument persists as to whether our current economic crisis will end with massive inflation or in a deflationary spiral. Ultimately, either one results in a Depression.

For investors, this argument is more than an academic one. It is the single most important variable for near and intermediate term investing success. It is also important in regard to taking actions which can prepare and protect you and your family.

Respected analysts are on both sides of the inflation-deflation debate. Each side makes a strong case for their position. Which group should one believe? In my opinion, the primary difference between the two camps is how narrowly or broadly they view the field of economics. For purposes here, it is useful to view conceptions of economics in the context of an imperfect taxonomy described as “narrow” and “broad.” These are neither technical terms nor normal classifications, although this dichotomyis useful for explanatory reasons.

The Narrow Perspective of Economics

The narrow perspective utilizes current or historical data as he input to mathematical models. Doing so produces a very strong case for massive deflation based on increased saving, lowered consumption and debt defaults. The amount of debt is the overwhelming problem. Government at all levels – federal, state and municipal — are hopelessly insolvent, especially when the ticking time bomb of pensions is considered. Debt in the private sector is also massive, primarily in the mortgage, student loan and consumer finance areas. The banking system is also insolvent and faces another crisis bigger than the previous one.

Bankruptcies and other debt defaults are inevitable. Debt contraction leads to money supply contraction which is the very definition of deflation. Thus the deflationary scenario is quite plausible and would produce a deflationary collapse, otherwise known as a Depression.

A form of “deterministic physics” is the basis for virtually all macroeconomic models. None of these models saw the current crisis coming. It is mechanistic and oriented to past relationships. Economics is a social science dealing with acting and reacting individuals who are constantly shifting their behavior in order to protect and improve themselves. People are not dumb molecules bouncing off walls of laboratory beakers. The rate at which molecules collide with walls can be determined using past behavior (or explanatory theory) because molecules do not change behavior. When human beings bump into walls, it is unpleasant so they purposefully adjust their behavior to reduce the probabilities of it recurring.

A Broader Perspective of Economics

The broad perspective of economics recognizes economics as a science of human behavior. As thinking beings, men act purposefully in order to achieve ends. As such it cannot be modeled like physics which depends on past actions repeating. That does not mean economics does not have fundamental laws which allow knowledge of what a rational response would be toward a particular end. The difficult problem is discerning ends or the intentions of the human being. That piece of knowledge is subjective and problematic, limiting the value of economics as a predictive science.

Future actions are sometimes reasonably predictable. While it is nearly impossible to predict the actions of millions and millions of individuals because of their differing goals, it is possible to reasonably predict the actions of the federal government, at least in the near term. To understand why, one needs to understand the behavior and motivation of politicians.

No politician anywhere in the world wants to have a Depression on his watch. No politician wants to even experience an economic slowdown. Hence, we can be nearly certain that government will take whatever actions it believes will avoid the bad experience. Ironically, prior attempts to avoid economic corrections make a Depression inevitable. As expressed by Bob Chapman:

[The] crisis has been with us for more than 50 years and this portion of that crisis could become a very dynamic closer as massive monetization and inflation is let loose. We are at the stage now that risk is growing exponentially, as central banks and governments aggressively intervene into markets causing major distortions. These actions set the stage for heretofore-unexpected events, now called “black swan” events.

Politicians have tools to defer some crises, but only by making future crises bigger. But future crises are of no concern to politicians who live in the moment, dominated by the Keynesian creed that “in the long run we are all dead.” All political decisions are designed to produce short-term fixes. Most only achieve cosmetic outcomes from which temporary political advantage can be gained. “Kick the can down the road” is used almost exclusively to describe such political actions.

Politicians must not allow a deflation, which equates to a Depression under current circumstances. So long as they control the printing presses, they will flood the system with liquidity in hopes that one final bounce can be elicited from the economy. Two crises are foremost in their minds.The insolvent banking system which will need to be bailed out again. Banks are carrying toxic assets on their books (made attractive by government changing FASB rules of accounting) which are grossly overvalued. If banks recognized these, the entire system would contract, plunging the economy into a Depression. Government knows this and encourages the fraud to continue. What cannot be ignored is a collapse of the banking system in Europe which will trigger a similar result here. The Fed is already surreptitiously involved in an effort to assist in the bailout of European banks.The federal government has no money and will soon be unable to pay its bills from revenues obtained from taxes and bond sales. Politicians will do anything rather than stopping payments on things like social security, medicare, military pay and the like. The government will sell bonds to the Federal Reserve (quatitative easing or printing money, if you prefer), to avoid this. The Fed has become little more than the “buyer of last resort.” Cutting spending back to the levels that can be funded by tax revenues and market bond sales is unacceptable to the political class. That will not happen during a recession, nor with a political class that has conditioned themselves and their constituents to the idea that the government has unlimited resources. A complete and total economic debacle will be necessary before this mindset is altered.

Politicians will not allow deflation. Of course, there is the risk of political miscalculation in the pursuit of this goal, but virtually no risk in determining what they will attempt to accomplish.

We are headed for high inflation which the Fed will undoubtedly rationalize as necessary in order to save the economy. There are two reasons for that:The level of inflation is dependent on the supply of money but also the demand for money. Arguably the Fed may be able to control the former. They are unable to control the latter which is determined by the millions of people who handle money. As inflation increases, people spend their money faster in order to beat expected price increases. This increases the “velocity” of money which changes the relationship between the quantity of money and economic activity. Ludwig von Mises termed this end stage as “the crack-up boom” which is accelerated spending that results in hyperinflation. The purchasing power of money is declining so rapidly that people do not want to hold it. Think Weimar Germany or Zimbabwe.The Fed cannot stop increasing the supply of money unless government limits its spending to what they bring in.

Unfortunately there is no way the Fed can calibrate the level of inflation. It is impossible, for example, to say that we will have an 8% level of inflation with any reasonable hope of achieving it. Neither politicians nor the Federal Reserve are capable of “managing” inflation in the sense that they can dial in some acceptable level and maintain it. Furthermore, inflation will not help the economy but can kill it. Once money reaches the “crack up boom” phase, it ceases being acceptable as currency. People resort to barter which is necessarily inefficient and costly. The economy shrinks and the economy plunges into a Depression. This result can occur in a highly inflationary environment (a hyperinflationary Depression) or it could devolve into a deflationary Depression. The decision as to which occurs is in the hands of the government and the Federal Reserve. If they continue printing, there will be a hyperinflationary Depression.

Whether the government chooses to pursue inflation or allow deflation to play out, economically the end is the same — a Depression. From a political standpoint, it is beneficial to continue to kick the can down the road. The bottom line is that a Depression is unavoidable. I am betting on the inflation choice based on politicians doing what is in their best interest rather than that of the country. There are decades of political greed and cowardice upon which my position rests. That is not going to change, regardless of who is elected in 2012.

If one believes that politicians will behave as I suspect, the only way to believe that deflation is our next step is that printing money is not inflationary. Even with a complete collapse in debt levels, there is no speed that the printing presses cannot match.

Saturday, March 17, 2012

To think that civilizations always progress is a sign of ignorance, if not stupidity.

Ludwig von Mises emphasized how proper institutions and incentives were necessary for progress. He knew that progress neither constant nor guaranteed. If institutions and incentives are damaged or destroyed, progress will cease and retrogression will set in.

Henry Hazlitt

History is replete with examples of how societies and civilizations revert to less prosperous times and conditons, often accompanied by rebellion and civil unrest. The Roman empire died from within. Oh, they were overrun but only after their empire had exhausted itself and its resources.

Mises used the phrase “time will run back” to describe the process of losing ground or retrogressing. Henry Hazlitt wrote a fictional novel using Mises’ phrase as the title in which changes in institutions, laws, incentives and freedom all combine to impoverish a previously prosperous and civil society.

Victor Davis Hanson details below how this process is already well underway in his home state. It is not limited to California. The same retrogression is underway in Michigan, Illinois and a number of other states. Inner cities in parts of the country have sections that are too dangerous to visit. The retrogression is underway and the regulatory apparatus and insolvency of Washington is destroying incentives. This process will not stop until the craziness that we call government is stopped.

In Greek mythology, the prophetess Cassandra was doomed both to tell the truth and to be ignored. Our modern version is a bankrupt Greece that we seem to discount.

News accounts abound now of impoverished Athens residents scrounging pharmacies for scarce aspirin — as Greece is squeezed to make interest payments to the supposedly euro-pinching German banks.

Such accounts may be exaggerations, but they should warn us that yearly progress is never assured. Instead, history offers plenty of examples of life becoming far worse than it had been centuries earlier. The biographer Plutarch, writing 500 years after the glories of classical Greece, lamented that in his time weeds grew amid the empty colonnades of the once-impressive Greek city-states. In America, most would prefer to live in the Detroit of 1941 than the Detroit of 2011. The quality of today’s air travel has regressed to the climate of yesterday’s bus service.

In 2000, Greeks apparently assumed that they had struck it rich with their newfound money-laden European Union lenders — even though they certainly had not earned their new riches through increased productivity, the discovery of more natural resources, or greater collective investment and savings.

The brief euro mirage has vanished. Life in Athens is zooming backward to the pre-EU days of the 1970s. Then, most imported goods were too expensive to buy, medical care was often premodern, and the city resembled more a Turkish Istanbul than a European Munich.

The United States should pay heed to the modern Greek Cassandra, since our own rendezvous with reality is rapidly approaching. The costs of servicing a growing national debt of more than $15 trillion are starting to squeeze out other budget expenditures. Americans are no longer affluent enough to borrow hundreds of billions of dollars to import oil, while we snub our noses at vast new oil and gas deposits beneath our own soil and seas.

In my state, Californians for 40 years have hiked taxes; grown their government; vastly expanded entitlements; put farmland, timberland, and oil and gas lands off limits; and opened their borders to millions of illegal aliens. They apparently assumed that they had inherited so much wealth from prior generations and that their state was so naturally rich, that a continually better life was their natural birthright.

It wasn’t. Now, as in Greece, the veneer of civilization is proving pretty thin in California. Hospitals no longer have the money to offer sophisticated long-term medical care to the indigent. Cities no longer have the funds to self-insure themselves from the accustomed barrage of monthly lawsuits. When thieves rip copper wire out of street lights, the streets stay dark. Most state residents would rather go to the dentist these days than queue up and take a number at the Department of Motor Vehicles. Hospital emergency rooms neither have room nor act as if there’s much of an emergency.

Traffic flows no better on most of the state’s freeways than it did 40 years ago — and often much worse, given the crumbling infrastructure and increased traffic. Once-excellent K–12 public schools now score near the bottom in nationwide tests. The California state-university system keeps adding administrators to the point where they have almost matched the number of faculty, though half of the students who enter CSU need remedial reading and math. Despite millions of dollars in tutoring, half the students still don’t graduate. The taxpayer is blamed in constant harangues for not ponying up more money, rather than administrators being faulted for a lack of reform.

In 1960, there were far fewer government officials, far fewer prisons, far fewer laws, and far fewer lawyers — and yet the state was a far safer place than it is a half-century later. Technological progress — whether iPhones or Xboxes — can often accompany moral regress. There are not yet weeds in our cities, but those too may be coming.

The average Californian, like the average Greek, forgot that civilization is fragile. Its continuance requires respect for the law, tough-minded education, collective thrift, private investment, individual self-reliance, and common codes of behavior and civility — and exempts no one from those rules. Such knowledge and patterns of civilized behavior, slowly accrued over centuries, can be lost in a single generation.

A keen visitor to Athens — or Los Angeles — during the last decade not only could have seen that things were not quite right, but also could have concluded that they could not go on as they were. And so they are not.

Ultimately the debate as to whether this crisis ends in a deflationary or inflationary collapse will be decided by the outplay of several forces. While it is impossible to determine which way this drama plays out (it could go either way), there are reasons to believe either position. Ultimately which side one takes depends on whether one believes:
that economic forces will be allowed to play themselves out or
that political intervention will occur to attempt to prevent these forces from working.

In a truly free market, the sorry existing state of affairs could never have developed. Massive political interventions enabled matters to get to this advanced state. The political motivation was not to cause a crisis but to prevent prior smaller ones from occurring. The belief that government could eliminate, or at least dampen business cycles, is false. All government accomplished was a cover up of problems, deferring them to a later periods when they resurfaced in bigger and more threatening fashion. After decades of this behavior, it appears we have run out of cover-ups. The problems now are too large to be contained without massive additional interventions.

If you believe that government will refrain from taking action, then you should believe that we will have a deflationary Depression. If you believe they will continue to try and play the game of “extend and pretend,” you must believe there will be high inflation ahead, probably culminating in a hyperinflationary Depression. Both alternatives end in Depression.

It appears naive to believe that suddenly intervention will stop. Indeed, interventionary efforts have only increased as evidenced by the exploding balance sheets of all central banks. And this continuing expansion is at a time when the authorities want you to believe that they are not engaged in quantitative easing.

Does anyone truly believe that politicians will stand by and allow another Great Depression to occur? That is what deflation means in this grossly exaggerated, Alice-in-Wonderland, over-leveraged world. No, in a fiat money system, it is too easy to run the printing presses. To see an explanation of how easy and the mechanics of doing so, see this article ”How Deflationary Forces Will Be Turned into Inflation“ by Thorsten Polleit at Mises.org.

In a fiat money system, inflation is always a political decision. It is not the outcome of proper economic policy. It is the last refuge of political cowards. It will not improve matters. Ultimately it will wipe out the middle class by destroying their savings. Then a Depression will occur, one which the population will be in substantially worse shape entering than the one in the 1930s.

Here is a take from The McAlvany Commentary. Especially relevant is the part where John Williams is interviewed. It begins around the 8:30 minute mark. Note a key point: The government cannot fund its operations. The option is to cut spending drastically or to print money! Which one do you believe is about to happen?

“Talk of a recovery is Orwellian in its deception.” So says Jim Willie in his lengthy piece dealing with the collapse of the US and probably the rest of the civilized world.

Mr. Willie is bold in his predictions/assertions, a style that has characterized his writing. To be sure, he is often early and sometimes exaggerated in his forecasts. Yet he is a man worth listening to because he provides early warning signals generally long before others. For those who believe I am a doomsayer, read Mr. Willie’s latest missive and prepare to consider me an optimist.

How much of this should you believe? That is difficult to say because I am not privy to all the knowledge that Mr. Willie apparently has. Those areas where I have some familiarity, I generally agree with his dire outlook. The road ahead will be unlike anything recent generations have seen. For most, outcomes likely to happen are unimaginable. To shock yourself out of complacency, read Mr. Willie.

It is up to you to decide how much of this is possible and what actions should be taken to protect yourself and family. All of it is possible, although with varying degrees of probability.

Whether the coming collapse is slow and orderly or takes place rapidly and haphazardly is not possible to foresee. As one wag observed, these things happen slowly until they do not. Thus, most people will not realize what is happening until it is too late.

What is clear is that a currency debasement strategy, the subtle and age-old way to default on debt obligations, has been selected by Europe and the US. By paying contracted debt back in nominal currency which has been devalued, the lender is being cheated. The monies purchases less than what was anticipated at the time of the debt contract. In essence, the government cheats all debt and fixed contract holders in an attempt to pretend to “honor” their obligations without outright default.

The description of this process is called inflation, and it can be as devastating as an outright default without the stigma associated with a legal default. In essence, the Federal Reserve has practiced this policy since its inception in 1913. From the time of its formation until today, the dollar has lost 96% of its purchasing power. “Lost” is a euphemistic term to hide the fact that the government has stolen this amount from its citizens, especially lenders and those living on fixed incomes.

There is political motivation to develop a new reserve currency by all countries other than the US. No existing currency other than the dollar can serve this role today. Regional currencies, ala the Euro, are possibilities. So too is a new one-world currency. Statists and one-worlders have pushed for this latter solution long before this crisis.

It is unlikely that a change of this sort can occur quickly because of politics. It is also ironic that such a change would put most of the world on a system akin to the failing Euro. Never mind that the Euro will fail; politicians always believes they are stronger than markets and economics. History always demonstrates the fallacy in such delusional thinking.

One thing is certain: the current situation cannot hold much longer. We are headed for sovereign defaults in numerous countries. The US, even with their dollar hegemony, cannot escape this fate.

It is impossible to reasonably forecast what will happen. Every day brings more pressures that are harder to containvia the old tried and trusted methods of “sweeping the problems under the rug.” The rug is now bulging with all the debris it contains. We edge closer to a worldwide currency collapse. There are no good options, at least from the political perspective. Here are the main options left:

Belt-tightening

Governments could slash spending and social programs to the bone. That is the only real solution to the problem, but it is considered “impractical” or “impossible.” In the case of the U.S., it would mean halving current government spending, including dramatic changes to social security and medicare. Changes of this magnitude will not happen because no politician has the courage to undertake such actions.

After almost a century of convincing citizens that government is the source of goodness and wealth, it is impossible to reveal the obvious — “we lied; there is no Santa Clause. Blood in the streets would ensue among a populace that is convinced it is entitled to live off others. Any other watered-down solution is nothing more than can-kicking, an attempt to buy time without truly addressing the underlying problems. These politically palatable half efforts might buy some more time but only at the expense of greater future pain. What is the point of buying time if it does not advance a solution?

Benign Neglect

Ignoring the obvious is exactly what caused us to reach such extreme danger. In this scenario the political class continues funding whatever deficits arise, as if there were no consequence. Eventually markets make this alternative either impossible or so expensive that expensive that governments can no longer afford the interest payments on their debt. This strategy is more of the “kick the can” approach that put us into the current predicament. It is by far the favored political choice, even in Europe where “austerity” is given lip service but will not be implemented in any meaningful fashion.

Currency Devaluation

The third option is deliberate currency destruction. In a fiat currency world it is easy to destroy the purchasing power of a currency. That is why I am so amazed at so many excellent analysts that argue that we cannot have inflation or hyperinflation in an over-leveraged society. As I understand their argument, debt destruction via defaults and bankruptcy is necessarily deflationary. That point is correct, but it assumes that government will passively stand by and allow this deflation to occur. I believe they will not.

So long as government can run its printing presses faster than debt defaults occur, there will be no deflation. That is not difficult to do and government has demonstrated a great deal of skill in this regard. Once matters begin to get dicey regarding debt defaults, I believe they would easily switch to a more aggressive tactic than the mere printing of money. Why not issue a brand new currency? Here is a simple scenario as to how this could happen.

New Currency

Tomorrow morning you awaken to a news announcement that a new currency will be issued. Some excuse(s) will accompany the announcement. These are not important, nor will they be valid, but could include reasons like counterfeit threats, national security considerations or a host of other phony reasons. The announcement states that within two weeks all existing currency will become obsolete. It must be turned in for “New Dollars” “New Dollars.” The exchange rate is one old dollar will get you two “New Dollars.” Existing bank deposits will automatically be doubled. It should be obvious that each New Dollar will only purchase half as much as each old dollar.

The kicker comes when it is mandated that all existing contracts can be met with New Dollars. So, if you owe $100,000 to someone, you can satisfy this obligation by paying him $100,000 of New Dollars (which are only worth half of the dollar on which the contract was struck). Overnight a law effectively reduces the debt burden in the country by 50% and raises the inflation rate by 100%, It does so by stealing wealth from the lenders and transferring it to borrowers. Banks would be the hardest hit, but government merely prints whatever amount of new dollars is required to make them whole. A massive new bailout with newly printed money bails out the banks.

Overnight inflation rises by 100% and then rises again with the bailout of the banks. Overnight pension problems like social security are solved, although payments buy 50% or less of what was anticipated.

Inflation is easy, but it is no solution to the problem. Yet it is more palatable in politician’s eyes than deflation which raises the costs of servicing debt. Or more palatable than truly reducing benefits to levels which can be afforded by government. Instead, the criminal class in Washington will choose to defraud its citizens rather than deal with the truth.

This action is manufactured inflation or hyperinflation. It is government cutting all its prior obligations (debt and social promises) in half by reducing the purchasing power of the currency by half (or more). It is a process which destroys retirees living on fixed pensions. It also destroys all savings and wipes out the middle class.

Workers see their wages and salaries rise, likely in line with prices. Hard assets double in value overnight. Even those who are fortunate to have their incomes increase proportionately pre-tax are made worse off as they are pushed into higher tax brackets, not because their purchasing power has increased but because their nominal incomes have. The government collects substantially more in taxes from this “bracket push,” especially from the phony capital gains that result. Everyone is made poorer except government.

Will it work? Of course not! This is what created the conditions for Hitler’s rise to power. Its results in other countries were always failures, often with great bloodshed.

Will this situation play out as I have outlined it? Probably not, but whatever occurs will likely be similar in its effects on citizens. Government is the predator and you are the prey.

I know of no asset that protects as well under such a scenario as well as gold — preferably physical gold. And, I am not sure that will even be effective in what may lie ahead. It may be the best of inadequate alternatives.

To think that civilizations always progress is a sign of ignorance, if not stupidity.

Ludwig von Mises emphasized how proper institutions and incentives were necessary for progress. He knew that progress neither constant nor guaranteed. If institutions and incentives are damaged or destroyed, progress will cease and retrogression will set in.

Henry Hazlitt

History is replete with examples of how societies and civilizations revert to less prosperous times and conditons, often accompanied by rebellion and civil unrest. The Roman empire died from within. Oh, they were overrun but only after their empire had exhausted itself and its resources.

Mises used the phrase “time will run back” to describe the process of losing ground or retrogressing. Henry Hazlitt wrote a fictional novel using Mises’ phrase as the title in which changes in institutions, laws, incentives and freedom all combine to impoverish a previously prosperous and civil society.

Victor Davis Hanson details below how this process is already well underway in his home state. It is not limited to California. The same retrogression is underway in Michigan, Illinois and a number of other states. Inner cities in parts of the country have sections that are too dangerous to visit. The retrogression is underway and the regulatory apparatus and insolvency of Washington is destroying incentives. This process will not stop until the craziness that we call government is stopped.

In Greek mythology, the prophetess Cassandra was doomed both to tell the truth and to be ignored. Our modern version is a bankrupt Greece that we seem to discount.

News accounts abound now of impoverished Athens residents scrounging pharmacies for scarce aspirin — as Greece is squeezed to make interest payments to the supposedly euro-pinching German banks.

Such accounts may be exaggerations, but they should warn us that yearly progress is never assured. Instead, history offers plenty of examples of life becoming far worse than it had been centuries earlier. The biographer Plutarch, writing 500 years after the glories of classical Greece, lamented that in his time weeds grew amid the empty colonnades of the once-impressive Greek city-states. In America, most would prefer to live in the Detroit of 1941 than the Detroit of 2011. The quality of today’s air travel has regressed to the climate of yesterday’s bus service.

In 2000, Greeks apparently assumed that they had struck it rich with their newfound money-laden European Union lenders — even though they certainly had not earned their new riches through increased productivity, the discovery of more natural resources, or greater collective investment and savings.

The brief euro mirage has vanished. Life in Athens is zooming backward to the pre-EU days of the 1970s. Then, most imported goods were too expensive to buy, medical care was often premodern, and the city resembled more a Turkish Istanbul than a European Munich.

The United States should pay heed to the modern Greek Cassandra, since our own rendezvous with reality is rapidly approaching. The costs of servicing a growing national debt of more than $15 trillion are starting to squeeze out other budget expenditures. Americans are no longer affluent enough to borrow hundreds of billions of dollars to import oil, while we snub our noses at vast new oil and gas deposits beneath our own soil and seas.

In my state, Californians for 40 years have hiked taxes; grown their government; vastly expanded entitlements; put farmland, timberland, and oil and gas lands off limits; and opened their borders to millions of illegal aliens. They apparently assumed that they had inherited so much wealth from prior generations and that their state was so naturally rich, that a continually better life was their natural birthright.

It wasn’t. Now, as in Greece, the veneer of civilization is proving pretty thin in California. Hospitals no longer have the money to offer sophisticated long-term medical care to the indigent. Cities no longer have the funds to self-insure themselves from the accustomed barrage of monthly lawsuits. When thieves rip copper wire out of street lights, the streets stay dark. Most state residents would rather go to the dentist these days than queue up and take a number at the Department of Motor Vehicles. Hospital emergency rooms neither have room nor act as if there’s much of an emergency.

Traffic flows no better on most of the state’s freeways than it did 40 years ago — and often much worse, given the crumbling infrastructure and increased traffic. Once-excellent K–12 public schools now score near the bottom in nationwide tests. The California state-university system keeps adding administrators to the point where they have almost matched the number of faculty, though half of the students who enter CSU need remedial reading and math. Despite millions of dollars in tutoring, half the students still don’t graduate. The taxpayer is blamed in constant harangues for not ponying up more money, rather than administrators being faulted for a lack of reform.

In 1960, there were far fewer government officials, far fewer prisons, far fewer laws, and far fewer lawyers — and yet the state was a far safer place than it is a half-century later. Technological progress — whether iPhones or Xboxes — can often accompany moral regress. There are not yet weeds in our cities, but those too may be coming.

The average Californian, like the average Greek, forgot that civilization is fragile. Its continuance requires respect for the law, tough-minded education, collective thrift, private investment, individual self-reliance, and common codes of behavior and civility — and exempts no one from those rules. Such knowledge and patterns of civilized behavior, slowly accrued over centuries, can be lost in a single generation.

A keen visitor to Athens — or Los Angeles — during the last decade not only could have seen that things were not quite right, but also could have concluded that they could not go on as they were. And so they are not.

Ultimately the debate as to whether this crisis ends in a deflationary or inflationary collapse will be decided by the outplay of several forces. While it is impossible to determine which way this drama plays out (it could go either way), there are reasons to believe either position. Ultimately which side one takes depends on whether one believes:that economic forces will be allowed to play themselves out orthat political intervention will occur to attempt to prevent these forces from working.

In a truly free market, the sorry existing state of affairs could never have developed. Massive political interventions enabled matters to get to this advanced state. The political motivation was not to cause a crisis but to prevent prior smaller ones from occurring. The belief that government could eliminate, or at least dampen business cycles, is false. All government accomplished was a cover up of problems, deferring them to a later periods when they resurfaced in bigger and more threatening fashion. After decades of this behavior, it appears we have run out of cover-ups. The problems now are too large to be contained without massive additional interventions.

If you believe that government will refrain from taking action, then you should believe that we will have a deflationary Depression. If you believe they will continue to try and play the game of “extend and pretend,” you must believe there will be high inflation ahead, probably culminating in a hyperinflationary Depression. Both alternatives end in Depression.

It appears naive to believe that suddenly intervention will stop. Indeed, interventionary efforts have only increased as evidenced by the exploding balance sheets of all central banks. And this continuing expansion is at a time when the authorities want you to believe that they are not engaged in quantitative easing.

Does anyone truly believe that politicians will stand by and allow another Great Depression to occur? That is what deflation means in this grossly exaggerated, Alice-in-Wonderland, over-leveraged world. No, in a fiat money system, it is too easy to run the printing presses. To see an explanation of how easy and the mechanics of doing so, see this article ”How Deflationary Forces Will Be Turned into Inflation“ by Thorsten Polleit at Mises.org.

In a fiat money system, inflation is always a political decision. It is not the outcome of proper economic policy. It is the last refuge of political cowards. It will not improve matters. Ultimately it will wipe out the middle class by destroying their savings. Then a Depression will occur, one which the population will be in substantially worse shape entering than the one in the 1930s.

Here is a take from The McAlvany Commentary. Especially relevant is the part where John Williams is interviewed. It begins around the 8:30 minute mark. Note a key point: The government cannot fund its operations. The option is to cut spending drastically or to print money! Which one do you believe is about to happen?

The end point is near. The only thing keeping both Europe and the US afloat is massive money printing by the ECB and the Fed. The world has reached the point where markets are increasingly unwilling to purchase government debt.

Downgrades by S&P of European countries, as usual, are behind the curve of what markets already reflect. Further downgrades will be forthcoming whenever the ratings agencies become too embarrassed to hold at current ratings.

It appears the only ones who still believe money creation will work are governments themselves. They refuse to cut back spending, bringing it into line with tax revenues. Undoubtedly this reluctance has something to do with maintenance of ”the myth of government.” Politicians have convinced constituents that government is the source of prosperity and “entitlements.” They have been so successful that slowing down this spending will produce civil unrest among recipients who believe they have a right to other people’s funds, even when these are not available.

It is doubtful that politicians truly believe the myth they created for the masses. But pols do know what will happen if they cease these payoffs. The masses will target them as enemy numero uno. As hunger sets in, looting and rioting will target anyone with assets. Thus, pols will continue to print money in an effort to “buy off” the masses even thought it will not solve any useful purpose other than their maintaining office for a bit longer.

But such a strategy is both selfish and harmful to the country. Printing money is not some harmless act to be used to fool citizens. It corrodes society and markets with insidious inflation. Inflation sets consumers against producers, as they are blamed for the price increases. It encourages class warfare as the middle class is slowly destroyed while the wealthy are able to prevent or minimize their own loss of purchasing power.

Inflation is not something that can be controlled at some pre-determined level. It is equivalent to setting a fire without the proper resources to contain it. When it breaks out it does so with a fury that cannot be controlled. People quickly take steps to spend money faster to beat the anticipated price increases. This condition is the precursor to hyperinflation which destroys both the economy and society. At this point, “saviors” like Hitler who claim they can solve everyone’s problems, generally arrive. Governments typically do not survive hyperinflations.

The video below, by Chris Ciovacco, explains why we may be nearing the point where control is lost. Pay special attention to the graphic where the money scam is revealed for what it truly is: insolvent central banks injecting money into insolvent banking systems so that insolvent banks can buy the debt of insolvent governments.

The entire system is bankrupt, morally and fiscally and is about to collapse. The taxpayer, whether he knows it or not, is making unknown, hidden “investments” which will come back to haunt him and his heirs for generations.